CHAPTER 5

Activity-Based Management and
Activity-Based Costing

Questions

1. Activity-based management is a management approach that associates the activities executed by an organization with the value customers derive from products. Efficiency and effectiveness are achieved by reducing the level of activities that do not create value for the customer and by improving execution of activities that do create customer value.

Specific tools beneath the ABM umbrella include activity analysis, cost driver analysis, activity-based costing, continuous improvement, operational control, performance evaluation, and business process reengineering.

2. Value-added activities are viewed from the customer's perspective because it is the customer who is the end evaluator of the “worth” of a product or service and, therefore, the activities involved in creating that product or service.

3. In a televised football game, the value-added activities are the actual game plays. Non-value-added activities consist of commercials and the time between plays. Activities such as “moving the chains,” measuring to determine if a first down was made, moving the ball from the end of one play to the point where it will be put in play next are all non-value-added activities. People who believe that the commercials are informative and interesting and that the time between plays allows them an opportunity to examine the strategies of the teams and project what each team is likely to do play may disagree with this assessment.

4. Yes, cost drivers exist in traditional accounting systems although they are called "bases for allocation."

In traditional systems, a single cost driver such as direct labor hours or machine hours is commonly used rather than multiple cost drivers. Also in traditional systems, volume-based cost drivers are more the norm